We develop a model of a dealer-intermediated over-the-counter market designed to study three major changes in the structure of the U.S. corporate bond market: the increase in dealers’ balance sheet costs, the emergence of electronic trading platforms, and the growing presence of bond mutual funds and ETFs. Our model provides a unified analysis of these changes, clarifies

the economic channels at play, and allows us to...

Incentive problems make securities’ payoffs imperfectly pledgeable, limiting agents’ ability to issue liabilities. We analyze the equilibrium consequences of such endogenous incompleteness in a dynamic exchange economy. Because markets are endogenously incomplete, agents have different intertemporal marginal rates of substitution, so that they value assets differently. Consequently, agents hold different portfolios. This leads to endogenous markets segmentation, which we characterize with Optimal Transport methods. Moreover,...